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The 3 Rules of Lending Money to Friends and Family

Can you think of a more uncomfortable situation than lending money to friends or family? (I didn’t think so.)

We take pride in our relationships with our loved ones, and any time that we agree to lend, there is a strong risk in damaging the core of the relationship. I have seen quite a few relationships that have deteriorated over the topic of money.

So in an effort to save you from that tension, here are the 3 golden rules to follow whenever you are asked to lend money, whether it is a friend or family member.

Rule #1: Try to help in other ways

Financial guru Dave Ramsey doesn’t think you should ever lend money, especially to family members. “It ruins relationships,” he says. “If you have money to help then give it, don’t loan it.”

But this isn’t something you should make habit of. If your cousin or friend keeps hitting you up for money on a regular basis, those requests resemble an inner problem they have, rather than a sincere financial crisis. A real friend understands that what’s yours is yours, and what’s theirs is theirs.

You can always offer help instead of a bailout. For example, instead of chipping in to make your friend’s auto payment, you could offer to help set up a budget plan. Helping a friend set up a budget is essentially more effective than actually lending money. If the budget you come up with is good, you could help to save your friend from years of financial woes.

Rule #2: If you must lend, make it official

Whenever you need to lend money, whether it is a family member or friend, you should always ask the borrower to sign a promissory note spelling out the terms of the loan. If the borrower fails to repay the loan, this will aid in protecting your interests in the matter.

“Create a written agreement with fixed payments at least monthly (i.e. don’t ‘pay whenever you can’) says Cheryl Krueger, a financial planner at Growing Fortunes Financial Partners. The written agreement should include the total balance of the loan (including the total interest to be paid) a firm repayment timeline, with due dates and signatures of both parties, notarized. If your friend or family member is late on their payments, a five-day grace period is a reasonable amount of time before hitting them with a fine or additional interest.

Remember to always make it more businesslike, so that neither of you feels like you’re taking advantage of the other. Keep your relationship completely separate from this official agreement, if you value your bond.

Tip: Only lend what you can afford. Much like the old gambling saying that you should “never bet more than you can afford to lose,” the same should be said for lending money to a friend or family member. It’s better to have one person who is financially strapped than to have two people who are short on money.

Rule #3: Be ready (and willing) to forgive

Unfortunately, when money is lent to family or friends, there is always a chance that some or all of the loan will go unpaid.

You’ll need to decide when to ‘let it go.’ “If you can’t embrace the idea that personal loans all too often become gifts then don’t lend the money to begin with, unless you are OK with losing a friendship or carrying anger toward a family member.” Suggests Brooke Salvini, Personal Financial Specialist with Salvini Financial Planning.

Money controls numerous facets of our lives, but you should never let it control your relationships. If you keep your lending arrangement professional and official, there is no reason why it cannot be a successful transaction.